Archive for the ‘1099-MISC’ Category

Last week we talked about Schedule E and this week it’s Schedule C. Yes, Schedule C has some changes and they look a lot like the changes on the new Schedule E.

First up is Lines I and J. This is the IRS’ trap to get more Form 1099 compliance. Be very careful how you answer these questions because if you have a large amount of expenses like professional fees and repairs, you could be opening yourself up to a notice or having the IRS take a second look at your return.

Also new is line 1a. This is to report income from the new Form 1099-K that reports merchant card and third party payments. If you take credit cards or use paypal, look for your 1099-K and this is where you’ll report that income.

Also new is line 27b. Right now it’s reserved for future use. I’m not sure where they’re going with that one so if someone knows, feel free to leave a comment.

That’s it. These are the first changes to these forms in a while and it gives a pretty good indication of what the IRS is on the lookout for. Their budget is being cut so they’re looking to 1099 compliance to help them out and they’re at least making taxpayers think about the 1099 issue by answering the questions.

I’ll get to how in a second, but this post ties in nicely with yesterday’s piece on Form 1099-MISC. The IRS revamped their Schedule E, that’s attached to your Form 1040 if you have either rental properties or you own an interest in a flow through entity (LLC and S-Corporations are the big two) where you receive a Schedule K-1. Page two is used to report your flow through entity activity and that’s largely unchanged. Page one has new stuff on it and it’s worth examining further.

The first big change is at the very top of the form where they now ask you two questions and both relate to Form 1099 requirements. In the famous words of Admiral Ackbar, “It’s a trap!!” The two questions seem innocent enough but what the IRS is basically trying to do here is make sure you’re meeting the newer (although they’ve always been around, the IRS just seems to be focusing on them) rules that require property owners to issue 1099s. If you operate your rentals under a business structure you probably should have been doing this anyway but now the IRS is on the prowl with regard to this particular issue.

The trap on Schedule E works like this. Say you’re preparing your return in April and you get to your Schedule E. You say to yourself, “I’ve never done 1099-MISC’s before, I’m not going to start this year plus it’s already too late,” so you check “no” to each question. The problem is, you’ve also reported $800 in professional fees, $1,300 in repairs and $2,000 in management fees, odds are some of those went to an LLC or a self-employed individual (you’re still not required to send corporations a 1099, we dodged that bullet when Congress repealed that provision that was in the health care law. So by saying no to those questions AND reporting those deductions, you’ve now increased your chances of hearing from the IRS. So beware and if you’re reading this now, either read up on (yesterday’s post is a quick primer) or talk to your adviser about getting out some 1099’s.

The other change to the schedule is line 3a. The IRS added a line to separately report income reported on the new Form 1099-K. If you take credit card payments or receive money from a third party network such as paypal.com and you exceed the minimums spelled out in the instructions, then you’ll get a Form 1099-K this year. If that 1099-K is for your rental, then that’s the line where you enter that information.

For a tax professional, the beginning of year tax season is broken up into stages. The one that not a lot of people know about (especially if they don’t own their business) is that first month of the year. If you do payroll, W-2s have to go out as do 1099s. If you’re small business (or a new CPA who’s never done 1099s before), here are a few tips to make things easier.

The first thing you should have been doing is collecting W-9s. This form has been revised recently and it gives you all the information you need to both determine whether a company should be sent a 1099-MISC as well as all of the information to prepare the 1099-MISC. Anytime you pick up a new vendor, it’s a good idea to get a W-9 from them.

Of course this is the end of the year so if you’ve gone an entire year without collecting 1099-MISC’s, it’s time to do some work. You should reach out to all of your vendors asking them to fill out the form. Some won’t send them back but others will especially the ones you’re still doing business with.

The next step is figuring out how much you paid each vendor. If you’re using something like Quickbooks and you’re using it effectively, then this shouldn’t be a problem. Just print out a report of payments made to each vendor. That’s the one thing you need (the amount paid) that isn’t on the W-9.

As far as preparing the forms, if you have Quickbooks, you can do 1099s within that program (you’ll need to buy forms from Intuit though). I do some 1099s so I’m still using off the shelf forms from OfficeMax. Within the forms package, you can get software that’s easy to use and best of all, if you use it from year to year, you can carry over the information from a prior year so you don’t need to replicate a lot of work.

One last suggestion, do something here. If you haven’t kept up with your 1099s and five of your 50 vendors sent them back, go ahead and send those five a 1099. Doing something is better then doing nothing.